I have just returned from a sourcing trip in Tangshan and I was marked by the blue sky and white clouds. In all my years in China, I have never seen Tangshan like this, let alone during winter. I have witnessed the same scene in the last week in Dingzhou, Anping, Shijiazhuang and other steel producing cities of China.
Clean Air at a Cost
New regulations in China have mandated anti-pollution measures / equipment / quotas / shutdowns etc. which have all led to increased costs amongst restricted supply. In Tangshan for instance, coal power is no longer permitted as a source of power for producing steel. The alternative, natural gas, is a cleaner energy source, but one that has lead to an increase of USD 10-15 per ton of steel.
With coal no longer a permissible source of (cheap) power, most coal processing machines lay ideal in most steel mills
Although most people appreciate the breathable air, there are hundreds of mills and processing plants that have been shutdown leading to lost income, unemployment and rising prices. Where shutdowns have not been mandated, increased costs have rendered many firms noncompetitive (locally and internationally) leading to bankruptcies and closures.
With the new regulations, electric furnaces have been targeted due to their typically high pollution and often smaller size in comparison to blast furnaces. The result has been extremely tight supply of steel especially billets that are necessary for downstream production, and which once constituted a major portion of China’s steel exports.
Not everyone is Upset with New Regulations
The biggest beneficiaries of the strict regulations have been blast furnace suppliers of steel billets. They have seen profits sour with figures of over USD 150 per ton. With some factories producing thousands of tons per week, business has been booming as artificially high profit margins continue.
On the other hand, downstream industries have been forced to buy raw materials at these elevated prices and ultimately the costs are being passed on to consumers. With fewer producers, elimination of the (Cheaper) electric furnace producers and new quotas, billet manufacturers have ripped immense profits during this period.
End of Cheap China?
Those who have paid close attention to the steel industry can only reminisce when steel prices were sub USD 150 compared to USD 600 per ton today. It is highly unlikely that the price will ever return to these figures.
Excessive steel billet (such as above) prices have caused a knock-on effect on downstream industries and manufacturing
Given that profits of the billets are abnormally high, it is possible that new regulations targeting certain enterprises will tame these margins therefore resulting in knock on effect for downstream industries, but its clear China has turned a chapter of cheap steel at all costs.
‘New Normal’ and the Changing China Opportunity
So what does all this mean for international firms looking to China for procurement or investment? Next week, I shall examine implications of this new normal.
(Walter Ruigu is managing director of CAMAL Group, a trade and investment advisory firm based in Beijing, Nairobi and Lusaka and can be reached at email@example.com)